Most people do not look forward to planning the distribution of assets upon their death, but it is a task everyone should face. A trust is a legal arrangement in which one person holds title to an asset and manages it for the benefit of another, and trusts are commonly used in personal financial planning.
One notable feature of a trust is its ability to bridge the gap between life and death: the person who establishes the trust can set rules that continue to operate after their death, and trusts can often be designed to last for many years or even generations.
Trusts can also be set up for the grantor’s own benefit for reasons beyond taxes. A trust can provide professional investment management, protect income if a venture fails, or serve as a backup if the grantor becomes unable to manage their affairs.
For example, a “standby trust” can be created to take effect only if certain conditions occur, allowing the grantor to retain control while having a plan in place for future incapacity.
Trusts can be created to benefit others as well, including children, a spouse, grandchildren, or parents. When the grantor wants to provide protections, supervision, or professional management for beneficiaries, a trust can be an effective tool.
Using a trust can address perceived gaps in a beneficiary’s experience or readiness to manage assets, which is why trusts are often used when minors or legally incompetent persons are beneficiaries.
Trusts also appeal to competent adults who prefer to avoid management burdens, want expert administration, or seek flexibility and potential cash savings. Trustees have fiduciary duties, and in some cases trustees may want or need specific liability coverage; see Trustee Fiduciary (Fiduciary Liability) Insurance for options that relate to trustee responsibilities.
Although avoiding probate may be a consideration, tax planning and creditor protection are often important reasons to use trusts. A properly drafted trust can transfer assets for a beneficiary’s benefit while shielding those assets from creditors, and many states allow so-called “spendthrift trusts” that limit a beneficiary’s ability to assign or lose interest in trust property.
For more on structuring trusts within an overall plan, see Trust Work and Estate Planning, which discusses how trusts fit into broader estate and financial planning strategies.
Careful consideration should be taken before establishing a trust, and it is wise to consult a qualified legal professional to ensure the trust is drafted to meet your goals and to comply with state law.
If you want personalized help evaluating options and next steps, talk to an agent.
Frequently Asked Questions
What is a trust?
A trust is a legal arrangement where a trustee holds and manages assets for the benefit of one or more beneficiaries according to the terms set by the grantor.
Can a trust help avoid probate?
Many trusts can help assets pass outside probate, but whether that is possible depends on how assets are titled and the specific trust structure.
What is a spendthrift trust?
A spendthrift trust includes provisions that prevent beneficiaries from assigning their interest and can make it harder for creditors to reach trust assets.
When is a standby trust useful?
A standby trust can be useful when a grantor wants to retain control but have a trust ready to take effect if they become incapacitated or meet other trigger events.